2.
Question 1
What is the early history of the Social
Security System and attempts to
change/reform it?
3
The Beginning
• 1935---Middle of the Depression
• A “National” Pension Plan is Born
– 1937 Payroll tax
• 1% each Employee and Employer
• On earnings to $3,000
• No Change until 1950
4
SOA 2005 Annual Meeting - 90PD, Social Security: What are the Facts?
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9.
Closing the Social Security Actuarial Deficit: What Do We
Gain?
20
2041
Costs
Percent of Taxable Payroll
2023
18
2017
16
14 Tax Revenues
12
10
8
2000 2010 2020 2030 2040 2050 2060 2070 2080
Source: 2005 Trustees Report (OASDI), Table IV. B1.
17
The Pure Tax Solution
Some Qualifications:
• Every dollar of surplus between now and 2030 must
be invested in stocks and bonds, not in special issue
Trust Fund bonds (special public-debt obligations).
• Every dollar of the special issue bonds currently in
the Trust Fund must be redeemed and invested in
stocks and bonds (representing ownership and
claims on corporations).
• This implies that the Federal Government would
control sizable voting interests in US corporations.
18
SOA 2005 Annual Meeting - 90PD, Social Security: What are the Facts?
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10.
Why not Continue to Invest the
Surpluses in Special Issue Trust Fund
Bonds?
These [Trust Fund] balances are available to finance future
benefit payments and other trust fund expenditures—but only in
a bookkeeping sense. These funds are not set up to be pension
funds, like the funds of private pension plans. They do not
consist of real economic assets that can be drawn down in the
future to fund benefits. Instead, they are claims on the Treasury
that, when redeemed, will have to be financed by raising taxes,
borrowing from the public, or reducing benefits or other
expenditures. The existence of large trust fund balances,
therefore, does not, by itself, have any impact on the
Government’s ability to pay benefits.
Analytical Perspectives, Budget of the United States
Government, Fiscal Year 2000. p. 337.
SOA 2005 Annual Meeting - 90PD, Social Security: What are the Facts?
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13.
We Have A Choice
1) Raise Scheduled Revenue
2) Lower Scheduled Benefits
3) Increase Retirement Age
• Must do at least one
• Enacting Change Relatively Soon
More advance notice
Gradual change
More options
25
The Next Changes
• Fix for the next 75 Years
• Make Financing Stable at the End
– Get cost and income in sync
– Get Trust Funds stable or rising
– Restore Solvency for foreseeable future
• By end of 75 years: Need--
– One third lower cost or
– Increase revenue by half or
– Some combination of these
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SOA 2005 Annual Meeting - 90PD, Social Security: What are the Facts?
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14.
Some Options
• Retirement Age
• Benefit Formula
• Cost-of-Living Adjustment
• Payroll Tax Rate
• Taxable Maximum
• Cover State and Local Government employees
27
Individual Accounts
• Could contribute to solvency
– If financed from General Revenue
– AND have benefit offset or clawback
• But will not help solvency if “carveout”
– Even assuming there is a benefit offset
28
SOA 2005 Annual Meeting - 90PD, Social Security: What are the Facts?
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16.
A Reform Consistent with The President’s
Outline
• All individuals currently 55 years and older stay in the old system.
• Participation is voluntary, at any time workers can “opt in” by making a
one-time election to enter the new system.
• Beginning in 2009 individual participants under age 59, will be allowed
to invest 4 percentage points of their Social Security taxes in private
accounts up to $1,000 per year
• The $1,000 cap on contributions will grow $100 per year, plus growth in
average wages.
• Benefits will be subject to progressive price indexation, low income
benefits will be fully wage indexed while high income benefits will be
fully price indexed.
• At retirement the annuity value of private accounts offset the defined
benefit payments at the realized real rate of return on Government
Bonds.
• The total retirement benefit is not guaranteed.
31
Whose benefits are not affected by the This
Reform Plan?
• Individuals born in 1950 and earlier
receive Social Security benefits as they
are currently scheduled.
• Low income workers receive the Social
Security benefits as they are currently
scheduled plus the net value of their
Personal Retirement Account annuity.
32
SOA 2005 Annual Meeting - 90PD, Social Security: What are the Facts?
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19.
The Bottom Line
• Fundamental reform with prepayment can revitalize
Social Security while reducing government debt.
• Over the short term, reform is not free.
• Over the long term, reform reduces taxes and
restores Social Security to a sound fiscal position.
• Reform will eventually benefit recipients and workers
alike by bestowing real ownership of pension
benefits.
• Even if we succeed with Social Security reform, the
even larger Medicare debt will remain.
37
Another Bottom Line (Steve)
• This Plan Specification is Not Complete
• Progressive Indexing (affecting disabled)
– 1.43% improvement in 1.92% 75-year deficit
– 4.62% improvement in 5.70% 2079 deficit
– But President suggests don’t affect disabled
• Net effect of Individual Accounts and Offset
– Worsen 75-year actuarial deficit
– Help 2079 annual deficit
• Bottom Line
– Need at least significant “transition investment”
38
SOA 2005 Annual Meeting - 90PD, Social Security: What are the Facts?
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20.
Question 4
What are the implications of Social Security
financing for Public Finances?
39
The Hard Facts of Transfer Systems
– The Debt Owed Current Generations
– Must be Paid by New Generations
40
SOA 2005 Annual Meeting - 90PD, Social Security: What are the Facts?
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23.
Question 6
Is it possible to move to a funded Social
Security system?
45
Possibilities
• Invest in the Trust Funds
– Can this be done?
• Invest in Individual Accounts
– How much difference would this make on total
national saving and investment?
46
SOA 2005 Annual Meeting - 90PD, Social Security: What are the Facts?
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24.
Some Fundamentals of Reform with Individual Accounts
• Who participates in the reformed system?
• Where do IA Contributions come from?
• Are participants compensated for accrued benefits?
• How does the benefit structure compare to current
Social Security?
• Are there any guarantees, and if so, what do they
cost?
• How much of the current Social Security debt does
the reform pay off?
• How much additional General Revenue is needed?
47
Are we in a PAYGO world?
• Can we really effect additional advance funding
through either Trust Fund or IA investments?
• To increase saving, we need to have someone
decrease consumption, at least in the near term
• Is it worth while to increase the rate of return on
Social Security if it is simply at the expense of
returns elsewhere in the economy?
• Or can we really create a climate with more
saving and less spending?
48
SOA 2005 Annual Meeting - 90PD, Social Security: What are the Facts?
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